A new accounting standard for financial instruments may pose significant challenges for the banking sector especially when dealing with expected losses, said Daniele Nouy, supervisory chief, European Central Bank.
On Tuesday, Nouy delivered a speech at the European Confederation of Institutes of Internal Auditing in Paris, which discussed the implementation of the International Financial Reporting Standard 9 (IFRS) and highlighted the importance of collaboration between external auditors and internal functions at banks. The new rule is slated to go into effect in 2018.
“The completion of this accounting standard as one of the responses to the financial crisis will bring major changes and challenges to the industry, mainly regarding the implementation of the new expected loss model,” Nouy said.
Reuters said that this rule would serve as a major turning point for financial institutions as they will be required to make some provisions according to the bank’s view on the riskiness of a loan, which will be measured against the economic outlook. Leaders of the Group of 20 economies have been calling for this new rule during the financial crisis, where banks slipped into trouble with bad loans.
The new accounting rule was drafted by the International Accounting Standards Board but is awaiting endorsement from the European Union in order to become mandatory in the 28-country bloc. Paul Ebling, a senior regulator at the Bank of England said that Britain’s major financial institutions would have to comply with IFRS 9 from 2018 even if there is a delay in implementation across the rest of Europe.